MedPAC examines Medicare spending shifts and hospital payment pressures

Depletion looms in as few as seven years for Medicare’s Hospital Insurance Trust Fund even amid long-term drops in Part A spending per beneficiary, according to insights from a meeting of the Medicare Payment Advisory Commission (MedPAC).

The Congressional Budget Office (CBO) has put the depletion date at 14 years out, or seven years later than the Medicare trustees’ most recent report, with key differences stemming from estimates of program spending through 2034. Regardless, societal trends raise questions about future inpatient hospital payment adequacy.

“The number of workers per Medicare beneficiary has been declining for decades,” said Rachel Burton, MPP, a MedPAC principal policy analyst. “This demographic trend means it’s only a matter of time before Medicare doesn’t have enough money to pay the full cost of payments to providers for Part A services.”

The goal of MedPAC’s Sept. 3 session was not to make policy recommendations in response to such trends, but rather to set the stage for the development of formal recommendations to be issued in early 2027.

Declining inpatient spending affects the Part A outlook

One trend that bolsters the sustainability of Part A, while leading some hospitals to pivot their operational strategies, is the decline in inpatient spending. Data shows not just a slowing of growth, but an actual decline in inpatient admissions as outpatient settings account for an increasing share of services, Burton said.

“The only reason to stay in the hospital is because you need someone to administer continuing treatment, usually a nurse, or you need someone to be watching you in case something goes bad that you can’t [address] at home,” said Danielle Pierotti, PhD, RN, a MedPAC commission member and vice president of health affairs and chief nursing officer at Mount Marty University in South Dakota. “This is what we’ve been aiming [for] for a really long time.”

Running counter to long-term patterns, recent years have seen an uptick in Medicare fee-for-service spending in hospitals, noted R. Tamara Konetzka, PhD, a commission member and professor at the University of Chicago.

Burton indicated the issue likely relates to a post-pandemic utilization rebound that is expected to level off within a few years.

Medicare Part B spending increases as care shifts to outpatient settings

Medicare Part B spending is rising rapidly, driven by higher utilization and high-cost drugs furnished in hospital outpatient departments (HOPDs). While shifting revenue toward outpatient service lines, the trend also raises scrutiny of outpatient pricing and site-of-service patterns.

“It seems like Part B spending really ratcheted up post Affordable Care Act, which had a lot of reforms related to moving people out of hospitals and into ambulatory settings, whether that’s ACOs, total-cost-of-care contracts,” said Cheryl Damberg, PhD, a MedPAC commission member and director of the RAND Center for Excellence on Health System Performance. “It’s really put a lot of pressure on that Part B space, and this greater volume and intensity.

“We have to think about this in the context of the workforce issue, because on the ground, healthcare systems are really struggling to meet this increased demand.”

Consolidation could reshape Medicare costs and hospital strategy

MedPAC and policymakers are focused on consolidation, saying hospital-physician integration can lead to higher prices if health systems gain local market power. Evidence on quality- and access-related outcomes is mixed.

“Recent studies have found higher-intensity inpatient and non-emergency ambulatory care after hospital-physician vertical integration, which may be a result of better outpatient care management, but the increase in inpatient utilization could also be a signal of a referral-driven mechanism,” said Alex Harris, PhD, MPH, a MedPAC policy analyst.

Particular concerns relate to private-equity-driven consolidation, with commission members calling for stronger safeguards to protect Medicare beneficiaries from observed increases in costs and deterioration in quality after such deals.

In certain cases, consolidation has been seen to boost healthcare quality. For example, a 2025 study found that some patients living in markets with large increases in hospital consolidation had a higher likelihood of early-stage cancer diagnosis and improved survival compared with patients in other markets.

Certificate-of-need (CON) laws and the Stark Law (i.e., the physician self-referral law) shape consolidation incentives and hospital-physician integration strategies, according to the discussion.

CON “drives up costs and restricts entry and competition,” said Brian Miller, MD, MBA, MPH, a MedPAC commission member and a practicing hospitalist and associate professor of medicine at Johns Hopkins.

Medicare Advantage payments add another financial pressure point

Medicare spends 14% more per beneficiary in Medicare Advantage (MA) compared with traditional Medicare, based largely on coding and risk adjustment patterns, according to information presented during the session.

MA payment and coding intensity incentives may indirectly fuel integration between hospitals and MA plans, or the increasing prevalence of narrow networks, as providers seek to capture favorable reimbursement rates.

A health plan executive sought to put some of the coding scrutiny on hospitals, noting a Blue Cross Blue Shield Association study that found 20% of hospital price increases after consolidation are due to coding intensity.

“Hospital coding intensity will get worse with the larger hospitals using their balance sheets to consolidate over time,” said Kenny Kan, a MedPAC commission member and vice president and chief actuary of Horizon Blue Cross Blue Shield of New Jersey. “As we tease out the historical composition, I’d like us to consider how the future will change and how policy responses need to flex appropriately.”

Pierotti said increased coding intensity may be “an effect of better capture of the critical thinking that’s happening in the patient care environment, and it may be entirely plausible that — particularly as we now have AI listening in the patient care room and capturing the critical thinking of the provider or of the nurse or the therapists, and they are considering multiple aspects of a whole person — that AI is capturing things that when they were documenting by hand, they didn’t remember to document.”

Federal policy changes could increase hospital financial pressure

Although Medicare is set to be less directly affected than Medicaid or the Affordable Care Act by the One Big Beautiful Bill Act (OBBBA), hospital finances and operations will feel the impact as the Medicaid work requirement and other key healthcare provisions take effect in 2027 and beyond. Medicare policies may need to be adjusted accordingly.

MedPAC needs to be prepared to study “all of the changes that are going to happen as a function of H.R. 1 [the OBBBA], and thinking about what the implications are related to greater uncompensated care, greater demand in emergency rooms for care, and what the effects are going to be for hospitals,” Damberg said.